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Abstract

Despite abundant literature on the social and economic benefits of
encouraging tiny "informal" firms, scholars generally agree that somewhat
larger enterprises create more unskilled jobs, use resources more
efficiently, and are better at building technological capacity. Yet the
vast majority of firms will never grow beyond six workers. This paper
argues that one very significant reason why small firms stay small is risk.
In Nairobi — and probably elsewhere — the economic and social
consequences of business failure are extremely high. Not surprisingly,
entrepreneurs try to protect themselves from failure and, in the process,
ensure that their firms will remain small. Our research identified four
risk-management strategies that work separately and together to discourage
firm growth. First, many entrepreneurs manage risk through flexibility. By
working in rent-free quarters, using family labour and little capital, they
minimise fixed costs and maximise opportunities for additional income.
Second, many small manufacturers also avoid risk by manufacturing standard
products for a known market. Third, successful entrepreneurs frequently
diversify their income and assets rather than expand a single
enterprise. Finally, moot prefer to preserve their land and other assets
unencumbered by debt. These rational responses to risky business
environment ensure that most firms will stay very small and, in the
process, work against formation of a dynamic manufacturing sector.
Policymakers are challenged to improve the enabling environment by
creating broad policies conducive to firm growth and by targeting specific
policies and programmes to small-scale industry. Kenya needs macroeconomic
and social policies that indirectly encourage firm growth by removing or
reducing business and background risks. The country also needs an
industrial policy that provides positive incentives for enterprising
business owners ready and willing to expand employment, improve efficiency,
and upgrade their technology and their workers' skills.